UK Inflation Eases to 2.5%; GBP/USD Reacts Amid BoE Policy Speculation

.UK Inflation Challenges Bank of England Rate Cut Bets

On Wednesday, January 15, the UK’s inflation data for December took center stage. The inflation data will likely influence expectations for the Bank of England’s (BoE) policy outlook.

The UK’s annual inflation rate eased to 2.5% in December, down from 2.6% in November. Despite the modest decline, headline inflation of 2.5% remained well above the BoE’s 2% target. Current inflation levels signal persistent pricing pressures, keeping the spotlight on policy decisions.

Key Data from the Office for National Statistics included:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose by 3.5% in the 12 months to December, unchanged from November.
• Transport, driven by higher fuel and secondhand car prices, had the largest positive contribution to the CPIH and CPI annual rates.
• Meanwhile, the largest downward contributions for the second consecutive month came from restaurants and hotels.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) increased by 4.2% in the 12 months to December, compared with 4.4% in November.
• Core CPI (excluding energy, food, alcohol, and tobacco) dropped from 3.5% in the 12 months to November to 3.2% in the 12 months to December.
• The CPI services annual rate fell to 4.4%, down from 5.0% in November.

Bank of England Signals Uncertain Rate Path

Bank of England Deputy Governor Sarah Breeden acknowledged recent signs of easing inflation. However, she signaled caution in adjusting monetary policy too quickly, stating:

“The recent evidence further supports the case to withdraw policy restrictiveness and I expect to continue to remove restrictiveness gradually over time. To be clear, I expect Bank Rate to come down over time as the effects of the large shocks of the past continue to abate.”

The BoE Deputy Governor could not state how quickly the Bank could cut interest rates, fueling policy uncertainty. Nevertheless, this was a shift in stance after supporting maintaining the 4.75% Bank Rate in December.

While December’s inflation figures might boost near-term rate cut speculation. Elevated inflation remains a hurdle for easing rates in Q1 2025. Traders should monitor BoE Monetary Policy Member reactions, with insights into the BoE rate outlook likely to influence GBP/USD trends.

Support for a February BoE rate cut could pressure the GBP/USD pair further. Conversely, concerns about cutting rates too early may drive the pair higher.

GBP/USD Response to Inflation Data

Ahead of the UK inflation report, the GBP/USD briefly climbed to a pre-report high of $1.22137 before falling to a low of $1.21922.

However, following the inflation report, the GBP/USD hit an intraday high of $1.22147 before sliding to a low of $1.21549.

On Wednesday, January 15, the GBP/USD was down 0.19%, trading at $1.21874.

Stay ahead of market shifts here with timely updates and expert insights into economic trends and their implications for global markets.